(Fortune Magazine) -- With oil prices hovering near record levels, you would think energy investors would be all smiles. But shareholders of oil and gas producer Apache, one of the stocks we recommended from our 100 Fastest-Growing Companies list last year, have been disappointed; the stock has dropped 5% since we cited it.

Now that we are in the final stages of preparing our 2006 Fastest-Growing ranking (look for it in the Sept. 18 issue), we wanted to check up on Apache to see what went wrong.

The main culprit has been the 39% drop in U.S. natural-gas prices since last August; domestic gas operations accounted for about 20% of Apache's revenues in the first quarter. Investors have also worried about Apache's big presence in the Gulf of Mexico, where oil supplies are thought to be dwindling and there is risk of hurricane damage.

In addition, companies pursuing unconventional energy plays like oil sands and ethanol have stolen the spotlight from more conventional exploration and production (E&P) outfits like Apache. (Charts)

But after talking with analysts and major Apache investors, we think the stock remains a solid buy. "I am a bit puzzled that the stock hasn't done better," says Charles Bath, who has 5% of his Diamond Hill Large Cap fund in Apache. "The opportunities are still outstanding."

For one thing, natural-gas prices are unlikely to go any lower. "We had a record warm winter and got storage to record-high levels," says Calyon Securities analyst Carin Dehne Kiley, who believes that surpluses have peaked and that prices should move up again by winter.

Also, concerns about Apache's exposure to the Gulf region are overblown. While the company recently made acquisitions in the Gulf - including an $845 million purchase from BP (Charts) - only 20% of Apache's total production comes from the area, down from 30% in 2000.

And though the Gulf may not offer a lot of growth potential, it does provide high rates of return. "The Gulf of Mexico just makes a potful of money," says Apache CFO Roger Plank. "Where we get our growth is in the other parts of our portfolio."

That portfolio spans the globe; Apache has operations in Argentina, Australia, Canada, China, Egypt, and the North Sea. The broad mix has enabled Apache to increase production in 26 of the past 27 years and boost reserves for the past 20 years.

For 2006, Apache has projected 10% to 15% growth in oil and gas production, and analysts expect earnings to increase 5%. Trading at just eight times the past 12 months' earnings, vs. 11 times for rival EOG (Charts), for example, the stock looks cheap.

"Here we are selling at a discount relative to our peers," says Plank, "and yet from my standpoint the company has never been in better shape to grow."

Susan Byrne, chairman of Westwood Management, which has held a stake in Apache for the past five years, agrees. "Every once in a while good companies are misperceived and they become much too cheap," she says.

"Apache has grown from a $5 billion specialty company into a $20 billion international E&P company. It's not Google, but there's nothing in the fundamentals that would have you do anything but buy the stock today."

And for bonus points, some stock watchers suggest Apache might be an appealing takeover target for a major energy company. All in all, the rewards seem to outweigh the risks.

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